How expensive of a house can I afford?
Rule of thumb (for anyone) is that the mortgage maximum should be between 2x and 3x the annual salary which is between $320,000 and $480,000. The more detailed rule is the 28/36 rule. No more than 28% of your gross income for a housing payment and no more than 36% for total debt payments. 28% of your gross is $3733. Currently mortgage amounts in excess of $417,000 are considered jumbo loans in most markets and since the $417,000 mortgage is in the middle of your affordability, let’s use that number. For a 30 year fixed mortgage at 6.25% (fixed rate, 30 year loan) would $2568. If you use the $120,000 as a downpayment the house price you are looking at is $537,000. Real estate taxes are a huge variable. I’ll assume for this exercise that they are 1.5% per year (this could be lower or much, much higher) or $671 per month. Insurance on a place that expensive could be $250 a month. So you are up to $3489 per month which is getting close to that 28% of your gross monthly income.
A. The short answer is that you can afford to buy a house that costs approximately two and a half times your yearly income. The long answer is that while the two and a half times income rule is a good starting point, the truth is that lenders look at your entire financial picture before deciding how much they will lend you, and different lenders may have different criteria. This means some lenders may allow you to buy a larger house than other lenders. The moral: best to shop around.
Chosen by Asker I’ve been telling people for so many years that high school algebra really IS of value after high school. Here’s your formula and a brief explanation: [($X/12) x (Z)] – $Y = MMP The Monthly Mortgage Payment you’ll qualify for is MMP. Take your annual salary and divide by 12. This gives you a gross monthly income. Multiply that by Z. That number will depend on your credit, down payment, reserves, etc. (meaning how good of a risk you look like to the lender) The number Z could be anywhere from 30% to 55%. Now, take away all your other monthly debt ($Y). This will include things like car payments, credit card bills, revolving credit, student loans, child support, etc. It does not include utilities or food. Lastly, the MMP you qualify combined with the interest rate you qualify for and the taxes and insurance (these vary drastically from one place to another) determine how much house you can buy. Hope this helps, though without credit info, the value of Z is within a pretty
